NATIONAL INCOME ACCOUNTING

1. National Income Accounting refers to “Measurement of National Income”. It is the compilation of all incomes earned by all factors of production in a country in a particular period.
2. It is calculation of the money value (or units) of all goods produced and services rendered in a country in a given period.
3. It is an exercise undertaken by the government to know the total units, or the money value, of all goods and services produced in a country in a year.

 

National Income Account

It is an account that shows major aggregates of national income (e.g. GDP, GNP, etc) and its components (major parts) like investment, consumption, government expenditure, exports and imports.

All countries of the world effectively participate in the measurement of their incomes periodically. This noble idea was initiated by the king of England in the 17th century (1688) to assess (know) the resources of England. It was introduced into Nigeria by A.R. Priest and I. G. Stewart in 1950 when they compiled our national income estimated at $597 (N1,194). Ghana initiated it in 1955, while Sierra Leone and Gambia imbibed the idea (started) in 1963:

“National Income is the total amount of money generated by all factors of production of a country in a given period”.

National income implies the total money value of all final goods and services produced by the people of a country in a given period, usually a year. In simple terms, National Income is the total income of people of a country in a given period, usually a year.

 

National income basic concepts

a) Gross Domestic Product (GDP) 

It is “the total money value of all final goods and services produced within a country in a particular period, usually a year.” It refers to only goods and services ? produced within the country (domestic production) without recognizing (taking into account) the net flow of income from abroad. That is, GDP only measures the goods and services produced within the country without taking into account of the. services rendered by our people (Nigerians) who stay in other countries.

 

b) Gross National Product (GNP)

1. It is the total money value of all final goods and services produced in a country plus net income from abroad in a given period, usually a year”.
2. It is the total monetary (retail) value of all final goods and services produced by the people of country irrespective of wherever they are (both within and outside the country).

Note:

Net income from abroad is the difference between receipt (money received) from and payment made to other countries in respect of services we rendered to other countries and services people of other countries rendered to us.

 

c) Gross National Income (GNI)

1. It is “the total amount of money or sum of all incomes received by all factors of production in a country in a given period, usually a year.”
2. Briefly, GNI is the sum of all factor incomes (incomes received by all factors of production) in a country, usually a year.

All things, like land, labour, capital and entrepreneurs, involved in production of goods and rendering of services receive incomes. And the sum of all the incomes (rent + interest + salaries + profits) accruing to all agents of production (land, capital, labour and entrepreneur) gives the GNI.

 

d) Net Domestic Product (NDP)

It is the total value of all final goods and services produced within a country minus depreciation.

 

e) Net National Product (NNP)

It is the total money value of all final goods and services produced in a country minus the value of depreciation (wear and tear) of capital goods plus net income from abroad in a year.

NNP = GNP – depreciation of capital goods.

Note:

GNP = GDP plus, Net Income from abroad.

OR

GNP – Net income from abroad = GDP.

Thus the difference between GNP and GDP is ‘Net Income from abroad’.

 

f) Net National Income (NNI)

It is the sum of all incomes received by all factors of production in a country minus depreciation in a given period.

Note: Any of the above terms preceded with ‘NET’ implies that depreciation has been deducted. That is, it implies ‘minus depreciation’.

 

Other related terms.

1) Factor Income and Factor payment

• Factor incomes are the rewards of, or incomes received by, all factors of production: land earns rent, labour salary, capital interest, and entrepreneur profit. Factor incomes and factor payments are synonyms.
• Factor payments are payments made to factors of production for their involvement in the production of goods. They are also rent, interest, salary and profit.

 

2) National Income at factor cost and market price

• National income at factor cost: It is national income compiled with the cost incurred and paid to factors of production. It is the sum of rent, interest, salary/wages and profit plus subsidies minus taxes.
• National Income at market prices: It is national income calculated with the present retail prices of goods and services. That is, it involves using the final (retail) market prices as the current values of the goods and services produced in a country in a given period. This gives GDP at market price. GDP at market price minus indirect taxes plus subsidies equal GDP at factor cost.

 

3) Nominal GDP and Real GDP

(a) Nominal GDP

• It is the GDP calculated with the current market prices. It is measured with the prices which have not been deflated or reduced from inflationary level to a constant level of prices.
• It is GDP measured in monetary terms; i.e. in unit of money, e.g. in Naira, dollar, etc.

 

(b) Real GDP

• It is GDP calculated with the base year prices. It is GDP deflated by the price index. Thus it is briefly referred to as ‘GDP at base year prices.’ You should note that base year prices are constant prices or prices without (element of) inflation.
• It is GDP measured in units of goods and services, but not in terms of money.

 

We wish to highlight the differences between nominal (ordinary) GDP and real GDP as follow:-

Nominal GDP

It is the GDP measured with the current market prices. It is measured with the prices which have not been deflated or reduced from inflationary level to a constant level of prices. Thus the prices have element of inflation. And it is briefly referred to as “Non-deflated price GDP”. Thus a change in the GDP may be due to changes in prices; but it is not due to changes in quantity of goods and services.

Nominal GDP is also referred to as GDP measured in units of money like Naira or US Dollar and not in units of goods and services. Hence it is also referred to as Money GDP.

 

Real GDP

It is the GDP measured at constant prices; or it is GDP deflated by the price index. That is, it is GDP measured by prices which have been reduced from inflationary level to a constant or stable price level over the years. Thus a change in real GDP is not due to changes in prices but it is due to changes in quantities of goods and services produced. Briefly, real GDP is deflated price GDP.

Real GDP is also referred to as GDP measured in units of goods and services and not in units of money like Naira and dollar. Hence it is called ‘GDP in real terms.

That is, Real GDP is nominal GDP divided either by GDP deflator or Price Index.

 

Per capita income (PCI)

It is an ‘average income of people of a country’. Briefly, it is income per person. It is a synonym of ‘output per person’. This is the case of physical goods; quantity of goods produced per person in a year.

Calculation of PCI – its formula:-

It is obtained by dividing national Income estimate (figure) by population size.

PCI = National Income figure ÷ Population Size

 

Example: Calculate the PCI of Nigeria in 1980 if GDP is N20 billion and her population size is 100 million.

PCI = N20,000,000,000 ÷ 100,000,000 = N200

Note: The best index for international comparison of standard of living is PCI.

 

Economic Growth Rate (EGR)

It is rate at which a nation’s total output of goods and services increases over a long time, like five to ten years. Briefly, it is the rate of increase in real per capita income.

Calculation of economic growth rate (EGR)

Its formula:-

Difference between two periods’ GDPs (two years) based on the first GDP (first year) items times 100.